TAKING STOCK

Imagine that you have a good idea, perhaps even a great idea, for a product that might help humanity--and, of course, make some money along the way. So you start your company and a few years later raise hundreds of millions of dollars by selling stock to the public.

Years go by, and the value of your stock swells and deflates depending on news of your progress. Then one disastrous day, your idea goes up in smoke. Maybe it wasn't ever workable, maybe the timing was off, maybe you got something a little wrong. For whatever reason, you never actually produce a widget; you never make a sale.

In most businesses, what happens next is simple: You go broke. After all, no product, no profit.

Unless you worked in the brave new world of biotechnology. Then you could walk away a millionaire. It happened in Boulder.

Late last year, after nearly fifteen years in business, Synergen Inc. ceased to exist. The value of its publicly traded stock had plummeted following the failure of a medication the company hoped would combat deadly infections. In November, Synergen's directors voted to sell to Amgen Inc., the largest biotech company in the world.

Well-timed stock sales: Many top executives had the foresight to sell large blocks of stock when Synergen was trading at its peak, making them instant millionaires.

Repriced stock options: In August 1994, just after the company laid off 60 percent of its workforce, Synergen's board of directors voted to lower the purchase price of stock options available to company employees. This controversial courtesy--which the board had granted its executives on other occasions--was not extended to public stockholders, who simply lost money when Synergen's stock dropped. But it was particularly helpful to the company's executives, who held tens of thousands of stock options from their salary packages and bonuses.

A golden parachute: Thanks to some last-minute maneuvering in the company's final months--including new contracts written just weeks before it was sold to Amgen--Synergen's top officers left with a severance package that started with three years' salary. For the company's top-paid executive, CEO Greg Abbott, that provision alone called for a goodbye check worth three quarters of a million dollars.

Synergen Associates was founded in January 1981 by four University of Colorado scientists, who planned to research and develop various genetic-engineering techniques. According to state records, the company was incorporated as Synergen Inc. in 1983.

Biotechnology--the business of cloning the body's own proteins and then using them to fight diseases--is not for the faint of heart. It is a long, bumpy and ultimately uncertain road from a good idea to a product. It can take hundreds of millions of dollars and more than a decade of lab work just to lay the necessary groundwork.

Which is why Synergen didn't really begin to take off until relatively recently. In its early years, Synergen teamed up with other biotech companies to do basic research and completed some small projects for commercial ventures, including Coors. Along the way, two of the original founders, Larry Gold and Marvin Caruthers, departed to pursue other research. A third, David Hirsh, left the company's day-to-day operations several years ago; today he teaches at Columbia University. Larry Soll stayed.

In 1990 Synergen launched human trials for its most promising product, a drug called Antril. The company touted Antril as a treatment for sepsis, a deadly spread of bacteria resulting from infection. Sepsis affects a half-million people every year in this country alone; nearly half of them die from it. Though tragic in human terms, such large numbers are encouraging news to investors and optimistic biotech companies.

Sepsis is an enormously complex condition, and several recent attempts to develop drugs to treat it all ended in failure. This is hardly unusual; industry analysts estimate that only one fifth of the proposed products that make it to human clinical trials eventually get approved by the Food and Drug Administration.

But in the business of biotechnology, a company need never produce anything in order for people to buy in. Because of the simple potential to earn huge profits, investors are willing to pour hundreds of millions of dollars into research that is odds-on to fail.

That's what happened with Synergen and Antril. Given the large potential market and Antril's promising early results, Synergen quickly became a hot property. By the end of 1990 its stock was selling at $17.25--a 263 percent gain in value over two years.

In 1991 the company raised more money, funds necessary to shepherd Antril through the clinical-testing and government-regulation processes. The public offering was successful, and Synergen soon had a $300 million bank account built on the promise of Antril.

That same year, the company moved the drug into Phase II clinical trials. While Phase I trials are meant to show a drug is safe, Phase II tests aim to prove it has some sort of positive effect on patients. (Phase III tests, the final stage before FDA approval, are designed to confirm Phase II results with more patients.)

By the end of 1991 Synergen's stock was burning up Wall Street. Shares closed the year selling at $68.50, four times their price just a year before. The heady environment was enough to make executives cocky. When one analyst criticized the company, according to an anecdote quoted in Business Week, co-founder and chairman Larry Soll mailed him a tin of Shinola shoe polish and a pile of plastic dog shit. An accompanying note suggested the analyst couldn't tell the difference.

Despite what seemed to be the impending, inevitable success of Antril--and thus Synergen--several executives apparently decided to make hay while the market suns were shining. They sold stock--lots of it. And as luck would have it, they redeemed their shares at the exact moment Synergen's stock was trading at its highest value.

For example, according to Securities and Exchange Commission documents, in January 1992, Michael Catalano, who at the time directed clinical research, unloaded 12,000 shares at $66.43 and collected $797,000. Four days later, co-founder Hirsh sold 35,000 of his Synergen shares at $67.32, for a take of $2.36 million. A day after that, Jon Saxe, then the company's president, let go of 20,000 of his shares at $68 each, raking in $1.36 million in the process.

And during the first week of January 1992, Soll himself sold a total of 55,000 Synergen shares. According to SEC filings, they fetched prices of anywhere between $65 and $73.50. Soll's total take: nearly $3.8 million.

The company continued surging throughout that year. In September 1992 Synergen opened a $45 million protein-production plant in Boulder. The sparkling new facility was designed to manufacture a key ingredient for Antril.

But in early 1993 Synergen's fortunes slipped. On Friday, February 19, the company learned that its latest clinical trials showed Antril was not nearly as effective as had been hoped.

The following Monday, Synergen announced to the world that its trial tests on Antril had been "disappointing." By the end of the day, the company's stock price had plummeted by a heart-stopping $29. The following day, flabbergasted investors--and eager lawyers--filed eight separate lawsuits, claiming that Synergen's executives had misled them about Antril's potential.

The fallout continued. In April President Saxe and clinical director Catalano resigned. The two men cited "differences in management philosophy" as the reason for their departure, but most observers suspected they were taking the fall for the poor performance of the company's best hope for a salable product.

Despite Antril's failure in the clinical trials, though, Synergen's scientists thought they saw a ray of hope. Data from the tests seemed to suggest that, even though the drug didn't work on a broad range of sepsis patients, it still might help the most severely ill ones. So in August 1993 the company launched new Phase III trials, which it hoped would prove that Antril still had some worth, although with a drastically reduced potential market.

That light flickered out less than a year later. On July 15, 1994, the company learned the results of those Phase III tests: Antril simply didn't work. The following day, a Saturday, Synergen held its company picnic. Since none of the employees had been told of the test results, everyone seemed to have a good time. On Monday the company announced that it was giving up on Antril, the product on which Synergen had staked its corporate life.

The company's future looked bleak. More than half of its $300 million stake was gone. And on the day Synergen announced that Antril was a bust, its stock free-fell 49 percent. Two weeks later, on August 1, the company laid off 60 percent of its 625-member workforce. By then its stock was trading at a miserable $3.88.

Recognizing that they'd soon run out of money, Synergen's officers began looking for "strategic alliances" with other companies--in other words, a bailout. One obvious choice was Amgen.

Amgen was everything that Synergen had hoped to become. When the Thousand Oaks, California, company placed its initial stock offering in 1983, shares sold for $18. Since then, the company has produced two blockbuster drugs and its stock has soared. Today Amgen has sales of nearly $1.5 billion. "I have subscribers who have made 100 times their investment on Amgen," says Jim McCamant, editor of the Medical Technology Stock Letter.

According to SEC filings, Synergen and Amgen had discussed the possibility of a business relationship as early as 1989. And as Synergen's future began to cloud in 1993, company officials again met with Amgen executives to discuss licensing Synergen's potential products. In November of that year, at a Los Angeles meeting, Synergen CEO Greg Abbott proposed that Amgen provide a cash infusion; Amgen declined.

In July 1994, after Antril had finally been declared a failure, Abbott and Amgen's CEO, Gordon Binder, talked again by phone. Several weeks later the companies' financial officers met in Boulder. On August 22, Synergen and Amgen signed a confidentiality agreement, and Synergen opened its books to Amgen's scientists and bean counters. On October 24 Amgen's top execs flew one more time to Boulder and met with Synergen's top four officers.

Three weeks after that, on November 17, what was left of Synergen found a new home. Amgen publicly announced that it was buying the Boulder company. The price: $262 million.

The hefty price tag was deceptive, however.
Among other things, Amgen was buying Synergen's cash--the Boulder company still had an estimated $105 million in cash reserves. Amgen also acquired Synergen's operating losses, which industry analysts calculate translated into at least another $35 million in tax writeoffs for Amgen. Finally, Amgen inflated its offer to include the estimated settlement price of the shareholder class-action lawsuit then pending against Synergen. That case was settled this March for $28 million; Synergen admitted no wrongdoing.

Subtract all those things, plus the value of Synergen's Boulder complex, and Amgen got Synergen for closer to $70 million. That still may seem like a prodigious chunk of change. But analysts say it's peanuts for a company that once was considered one of the most promising biotech stocks in the country.

What had once been the twelfth-largest company in Boulder County tried to take care of its former employees. Synergen set up a recruitment center so that other biotech firms could hire its laid-off workers. It also allowed former employees free use of fax and copy machines and telephones for several months.

The company offered a decent severance package as well. Those who had worked at Synergen for less than a year received six weeks' pay with their pink slips. Others got more: up to sixteen weeks' worth of pay, depending on how long they'd worked for Synergen. And the company bought back stock options workers had earned through their time there and through performance bonuses.

Those measures don't begin to compare with the steps Synergen's executives took to cushion their fall, however. In fact, the company's top officers had begun packing their parachutes several months earlier.

In April and May of 1993, for instance, shortly after the company revealed the "disappointing" clinical results for Antril, Synergen's board of directors approved new employment contracts with the company's officers. According to disclosure documents on file with the SEC, the five top executives were to be paid anywhere from $150,000 (Soll) to $250,000 (CEO Abbott).

Because of the company's unfortunate performance and cash shortage, some volunteered to accept less. Instead of taking the $215,000 he was entitled to by contract, for example, research and clinical affairs director Robert Thompson agreed to be paid only $185,000.

Synergen's board helped soften the blow, though. All five men were promised severance packages of two years' salary (the full amount, not the voluntarily reduced amount) in the event of a "change of control" at Synergen.

Even more lucrative, however, was the board's vote to grant the company's top officers a controversial perk called stock-option repricing, which reduced the amount they would have to pay if they exercised their stock options.

Stock options are commonly used to compensate employees, particularly executives. They give the worker an opportunity to buy a piece of the company at a guaranteed price. If the value of a company's stock later goes up, the worker can then buy it at the lower price, sell it at the new, higher price and collect the difference.

For top officers, especially, stock options offer a powerful incentive. If an executive works hard and well, the thinking goes, the company's value will increase and his stock options will reward him proportionately.

Option repricing chips away at that incentive.
Bud Crystal, a professor at the University of California at Berkeley's Haas School of Business, specializes in studying executive compensation; he also helped the SEC write new disclosure rules on stock-option repricing.

He says the idea of revising executives' option prices downward after a company performs poorly is like a reverse high-jump competition. Instead of being eliminated when they miss a jump, the contestants--the executives--are given another chance at a lower target. "It's not an exciting sport for the crowd," says Crystal, "but it's terribly exciting for the participants."

Repricing, he concludes, "illustrates the perversity of executive compensation. It's not so much to give you pay for performance; it's just to give you pay."

According to SEC filings, in April 1993 the compensation committee of Synergen's board of directors voted to lower the price of its executives' stock options. In a report, the committee explained that it "approved this action because it believes retaining key employees is in the best interest of the stockholders and the company."

The report continued: "During the spring of 1993, following a decline in the stock price, and a major restructuring which included a significant number of employee terminations, key employees were being contacted by companies and agencies about employment opportunities elsewhere. The committee believes re-pricing of the options was the most effective employment retention device available."

Throughout 1993, several officers took ample advantage of the opportunity to reprice their stock options. Abbott, for instance, had 50,000 options repriced, from as high as $52.75 a share all the way down to $10.60 a share, according to SEC filings.

That November, despite Synergen's disappointing year, the board voted to award its executive officers still more stock options in lieu of a year-end bonus. Soll, Abbott, Thompson and vice presidents Mark Young and Ken Collins each received options to purchase 40,000 shares of stock for their roles in "keeping the company on target with its goals" and "setting clear priorities," according to a company disclosure filed with the SEC.

Those extra stock options came in handy the following summer. On August 25, 1994--three days after Amgen and Synergen signed their confidentiality agreement--Synergen's board of directors voted to reprice its employee stock options one more time. Although employees had to swap three shares to receive two, the good news was that any options they held to purchase stock at more than $7 were now reduced to $4.75.

Synergen's executives had their landing padded one final time. On October 26, 1994--two days after Amgen's and Synergen's top executives met in Boulder and three months after the company laid off most of its workers--the board amended the employment contracts of Synergen's five top executives. The new clauses were to be activated in the event of a change of control at Synergen.

For starters, each of the officers would receive 100 percent company-paid health, dental and life-insurance benefits for two full years. Next, with the exception of Soll, each of the men would get a one-time lump payment equal to a year's salary. And finally, the October changes guaranteed that if an executive officer was terminated within twelve months of a change of control at Synergen, all his options to acquire stock in the company would become fully vested.

Two weeks later Synergen announced a whopping $47 million quarterly loss. A week after that, on November 17, Amgen announced that it was buying Synergen for $9.25 a share.

They lost their company, but Synergen's top executives are now millionaires.
According to SEC filings, Amgen's agreement with Synergen calls for stockholders to cash in their stocks and options within six months of the takeover--which means two weeks from now.

When he does (if he hasn't already), Abbott will enjoy a lucrative payday. Thanks to his contract and the October amendment, Abbott will receive three times his annual salary, or $750,000. Next, he cashes in his Synergen stock, about 61,000 shares that each fetch the $9.25 that Amgen paid as part of the takeover deal. That's another $564,000.

Finally, as a result of the repricing agreements and the company's deal to fully vest its employees' stock options, the former Synergen president and CEO gets to keep the difference between his drastically repriced options and their sale price to Amgen. That comes to a profit of $4.50 a share. With his approximately 178,000 options, that's another $1.29 million for Abbott.

All of which adds up to a goodbye deal of about $2.6 million for the CEO, who worked for Synergen for eight years.

Founder Soll makes out even better. Even though he was entitled to only two years' severance pay--or $300,000--in the event of "a change of control" at Synergen, he owned a considerable chunk of stock. In all, Soll checks out of the biotech business with a gold watch worth approximately $3.7 million. (Unknown is how much of his own money Soll spent to start the company fourteen years ago.)

Although Collins, Hirsch, Thompson and Young didn't do quite as well, each left Synergen with severance packages worth anywhere from $1.4 million (Collins) to $2.1 million (Thompson).

The former executives weren't willing to discuss their well-padded departures. Former CEO Abbott, who still maintains an office at Amgen, was in Spain last month, although a secretary said he was calling in for messages. Former Chairman Soll did not return several messages left on his home telephone answering machine. Arthur Hayes, a Synergen director who served on the compensation committee, did not return numerous messages left at his home and company in New York. And compensation committee chairman Glenn Utt, reached through Sugen Inc., another biotech company where he sits as a director, declined to comment, on the advice of his attorneys.

According to an annual survey of biotech executives conducted by BioWorld CEO Compensation Report of Atlanta, Synergen's executives worked for middling, even low salaries, by industry standards. And, while analysts acknowledge that the valuable going-away presents voted to Synergen's executives were generous, they say the packages were not outlandish for the business.

"From a philosophical standpoint, I'm opposed to golden parachutes," says John Clinebell, chairman of the University of Northern Colorado's finance department. "As a realist, though, I know that they're very common."

Indeed, perhaps the most interesting thing about how lucrative Synergen ended up being for its top officers--despite the company's evaporation--is how common such deals appear to be in the biotechnology industry.

When Amgen bought Synergen, it agreed to keep the company as a subsidiary for one year. At the end of 1995, Synergen Inc. will no longer exist. In the meantime, some of the company's products are still spilling out of the pipeline.

In addition to Antril, for instance, Synergen's labs had been investigating the possibilities of a drug called rhCNTF, which had shown some promise in the treatment of amyotrophic lateral sclerosis, or Lou Gehrig's disease.

Three months ago, however, rhCNTF met the same fate as Antril. In February, Synergen, now a division of Amgen, halted development of the drug. Results from the latest clinical trials showed that it performed no better than a placebo.

In late April the Denver Post published its annual listing of the region's hundred largest public companies, in which analysts evaluated the corporations' performances. Finishing dead last was Synergen. According to the analysts' calculations, an investor who bought $1,000 worth of Synergen stock at the end of 1992 would now have an asset worth a paltry $142.

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